Q: Does it matter that GDP is being recalculated upward by about 3% to take into account the value of books, movies, software, research and other pieces of the “knowledged-based” economy?

Panel's answer: Yes 6, No 2

GDP measures the monetary value of final goods and services produced in the nation during a specific period of time. Economists and policy makers use GDP to measure the adequacy of the economy’s performance by comparing it against past or expected trends. Trends over the past two decades indicate that the U.S. may be entering a new economic era as the service sector and the corresponding knowledge infrastructure account for an increasing portion of the economy and could hold the key to sustainable economic growth and development. As the elements that are responsible for economic growth change, GDP as a measure of growth must also change.

The recalculation further masks the true health of the U.S. economy. States and companies having real producing assets such as manufacturing or oil and gas production will appear to lag states such as California with large R&D and creative work expenditures. States and municipalities with underfunded pension plans will seem to be more prosperous, making states such as California less at risk of being downgraded. Methodology guidelines will be so subjective, however, that historical comparisons and with other countries will become nearly meaningless. Fuzzy accounting only kicks the proverbial can down the road to the inevitable day of truthful financial reckoning.

With the U.S. economy moving away from an industrial economy to one that is more knowledge-based, increasing importance will be put on the creation of intellectual property. While other sectors of the economy, particularly manufacturing, are under pressure, the United States is still relatively healthy when it comes to the creation of intellectual property. So the U.S. economy will appear better under the new measure. It remains to be seen whether we can maintain that advantage given the cuts that have been made to higher education funding. Of course, the revision has to be applied to previously released data to allow consistent comparisons over time.

Nobody’s going to wake up any richer on July 1 than they were on June 30. And when the Bureau of Economic Analysis calculates the growth rate from Quarter 2 to Quarter 3, they will do so on a consistent basis, that is, using the new concepts, so this won’t change the reported Q2-to-Q3 GDP growth rate or the reported Q1-to-Q2 growth rate. It will change the reported level of GDP starting in July, but that really shouldn’t make much difference to anybody.

It matters a great deal. This is a much better snapshot of true productivity in an economy that is ever more rooted in knowledge- based productivity. It achieves a new benchmark, but it will not skew the trend line which will be similarly adjusted backward. So the actual relative increase in GNP as a percentage will be small. But it reflects substantial additional and real output from the American economy. It also gives us pause to reflect on how much our economy has changed: from the tangible and durable, to the digital and tweetable.